UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date
of
Report (Date of earliest event reported): July 26,
2007
BEAZER
HOMES USA, INC.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
001-12822
|
54-2086934
|
|
(State
or other jurisdiction
|
(Commission
|
(IRS
Employer
|
|
of
incorporation)
|
File
Number)
|
Identification
No.)
|
1000
Abernathy Road, Suite 1200
Atlanta
Georgia 30328
(Address
of Principal
Executive
Offices)
(770)
829-3700
(Registrant's
telephone number, including area code)
None
(Former
name or former address, if changed since last report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligations of the registrant under any of the following
provisions:
| o |
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR
230.425)
|
| o |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
| o |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
|
| o |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR
240.13e-4(c))
|
Item
2.02 Results of Operations
and Financial Condition
On
July
26, 2007, the management of the Company hosted a conference call to discuss
the
Company's financial condition and results of operations for the quarterly
period
June 30, 2007. This conference call was webcast and was broadly accessible
over
the Company's website at www.beazer.com. A written transcript
of this
conference call is attached hereto as Exhibit 99.1.
Item
9.01 Financial
Statements and Exhibits
(d)
Exhibits
| 99.1 |
Transcript
of July 26, 2007 conference
call.
|
2
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
BEAZER
HOMES USA, INC.
|
|
|
Date:
July 27, 2007
|
By:
/s/
Allan P.
Merrill
|
|
Allan
P. Merrill
|
|
|
|
Executive
Vice President and
Chief
Financial Officer
|
3
EXHIBIT
99.1
BEAZER
HOMES CONFERENCE CALL
RESULTS
FOR THE QUARTER ENDED JUNE 30, 2007
JULY
26, 2007, 11:00 AM EDT
Operator
Good
morning and welcome to the Beazer Homes third fiscal quarter 2007 earnings
conference call. Today's call is being recorded and will be hosted by Ian
McCarthy, the Company's Chief Executive Officer. Before he begins, Leslie
Kratcoski, Vice President of Investor Relations, will give instructions on
accessing the Company's slide presentation over the Internet and will make
comments regarding forward-looking information. Ms. Kratcoski, you may
begin.
Leslie
Kratcoski -
Beazer Homes - VP IR
Good
morning and welcome to the Beazer Homes conference call on our results for
the
quarter ended June 30, 2007. During this call, we will webcast a synchronized
slide presentation. To access the slide presentation, go to the Investor
homepage of Beazer.com and click on the webcast link in the center of the
screen.
Before
we
begin, you should be aware that during this conference call we will be making
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially. Such risks, uncertainties and other factors are described in the
Company's SEC filings, including its annual report on Form 10-K for the year
ended September 30, 2006, and other reports filed with the Commission from
time
to time.
Ian
McCarthy, our President and Chief Executive Officer, and Allan Merrill, our
Executive Vice President and Chief Financial Officer, will give a brief history,
after which they will address questions you may have for the duration of this
one-hour conference call. In the interest of time and allowing everyone a chance
to ask questions, we do kindly request that you limit yourself to one question
and then one follow-up.
I
will
now turn the call over to Ian McCarthy.
Ian
McCarthy -
Beazer Homes - President & CEO
Thank
you, Leslie, and thank you all for joining us on the goal today. The financial
results we have announced this morning for the third quarter of fiscal 2007
reflect the extremely challenging operating conditions we continue to
experience. Revenues totaled $761 million on 2666 home closings, decreases
of 37
and 36% respectively from the prior year's third-quarter results. Our average
sales price of $282,500 for the quarter is flat with both the same quarter
a
year ago and the March quarter.
Comparisons
of average sales prices between periods is less informative than in the past,
however, since the incentives we and other builders offer buyers are often
reflected in cost of sales and marketing expense rather than in the form of
lower prices. When possible, we try to maintain base prices in our communities
as we build through them.
In
light
of the current market environment and following our regular comprehensive
quarterly review of our inventory and land option contracts, we incurred $158.7
million in pretax charges this quarter for abandonment of land option contracts
and inventory impairments. In addition, we incurred $29.8 million in pretax
impairment charges related to goodwill allocated to operations in Northern
California, Las Vegas and Tampa. As a result, we recorded a net loss of $123
million or $3.20 per share for the quarter. In the third quarter of the prior
year, net income was $102.6 million or $2.37 per diluted share.
Our
results for the third quarter clearly reflect that operating conditions in
the
housing industry declined further in our fiscal third quarter and remain very
challenging. Most housing markets across the country continue to be
characterized by an oversupply of both new and resale home inventory, reduced
levels of consumer demand for new homes, and aggressive price competition among
homebuilders. These factors together with a pronounced credit tightening in
the
mortgage markets, particularly for credit challenged home buyers, are likely
to
lead to continued difficult market conditions for Beazer Homes and other
homebuilders.
During
the third quarter, we remain disciplined in our operating approach and continue
to focus on initiatives aimed at positioning us for what we believe will
continue to be a challenging environment. These initiatives include reductions
in both direct construction costs and overhead expenses to improve profitability
at current business levels, fewer and smaller land and land development
investments leading to a reduced lot count, and an intense focus on marketing,
promotions and sales initiatives to enable us to reduce the number of unsold
homes and increase our cash balances.
There
are
quantifiable examples of successes we have achieved to date. We have eliminated
an annualized $60 million in corporate and divisional overheads and achieved
meaningful direct cost savings. Our lot position is down 31% from year-ago
levels, and our number of unsold finished homes is down 26% from year-ago
levels. We believe this disciplined approach to the business coupled with our
broad geographic and product diversity will enable us to endure the difficult
market environment today and position us to fully participate in the eventual
upturn.
Although
we cannot predict when market conditions will improve, we continue to maintain
that the long-term industry fundamentals based on demographic-driven demand
and
employment trends, together with further supply constraints, remain
compelling.
For
the
June quarter, new homes orders totaled 3055, a 30% decline from the prior year's
third quarter, with declines in all geographic segments. The cancellation rate
defined as cancellations as a percentage of gross new orders for the third
quarter was 36% compared to 34% in the prior year's third quarter, and was
up
sequentially from 29% in the second quarter of this year.
As
a
percentage of beginning backlog, which is of interest to some in the investment
community, the cancellation rate was 31% in the third quarter, higher than
25%
for the same period in the prior year, but interestingly lower than the 40%
in
the second quarter of this year. We continued this quarter with our strategy
of
clearing unsold inventory through the use of integrated national marketing
efforts across the country. In contrast to earlier times, the housing market
has
become increasingly promotional with aggressive competition among
homebuilders.
Given
the
reluctance of potential home buyers, it has become increasingly important to
conduct campaigns and offer attractive incentives. We maintain our belief that
a
single national brand is important for us to successfully and efficiently
implement such promotions across our broad geographic presence.
At
June
30th, our unit and sales dollar backlog stood at 5952 homes and $1.69 billion
respectively. Unit backlog remains considerably lower year-over-year, down
37%,
but did increase by 7% sequentially from the March quarter; the second quarter
in a row that it has done so. Average sales price in backlog stands at
approximately $284,000, representing a 6% decline from the prior
year.
Before
turning it over to Allan to provide further details on our quarterly results,
I
would like to take a few moments to provide a summary of the facts to date
as it
relates to the recent government inquiries and litigation. As previously
disclosed on March 29, 2007, Beazer Homes received a subpoena from the United
States Attorney's office in the Western District of North Carolina seeking
the
production of documents focusing on the Company's mortgage origination services.
On May 1, 2007, the Company received notice that the Securities and Exchange
Commission had commenced an informal inquiry to determine whether any person
or
entity related to Beazer Homes had violated federal securities
laws.
As
we
reported in our 8-K earlier this week, on July 20th the Company received a
formal order of private investigation issued by the SEC in this matter. We
intend to continue to fully cooperate with all related inquiries. Together
with
certain of our subsidiaries and current and former officers and directors,
the
Company has also been named as a defendant in several lawsuits, including
purported class-action lawsuits.
In
response to these matters, the audit committee of the Beazer Homes Board of
Directors and its independent legal counsel and financial consultant launched
an
internal review of Beazer Homes mortgage origination business and related
matters. Management is fully cooperating with this investigation which is being
conducted independent of management.
The
Company cannot predict the ultimate outcome of these matters or the length
of
time it will take to resolve them. Additional disclosures are included in our
earnings press release issued this morning.
I'd
now
like to turn it over to Allan Merrill, our recently appointed Chief Financial
Officer, to further discuss our financial results and other items.
Allan
Merrill -
Beazer Homes - EVP & CFO
Thank
you, Ian. Revenues totaled $761 million in the third quarter on 2,666 home
closings, down 37% and 36% respectively from a year ago as we closed fewer
homes
from the year before in virtually all markets. Our backlog conversion ratio
was
48% during the quarter compared to 45% in the same period of the prior year.
Our
operating margin for the quarter continued to be negatively impacted, both
by
higher discounting and reduced revenues as compared to the third quarter of
last
year. The current environment is extremely challenging, but we remain focused
on
reducing cost and enhancing liquidity.
We
continue to seek opportunities to reduce costs over the next several quarters,
including reductions in direct construction costs achieved through value
engineering, SKU rationalization and reductions in plan specifications, as
well
as through ongoing contract review and renegotiation. To put this in
perspective, next year we expect to benefit from more than $50 million in direct
cost savings already achieved, and we believe additional reductions are
possible.
Our
results reflect a $6 million benefit from a reduction in warranty accruals
associated with the Trinity Homes class-action settlement. Since we began the
remediation program, which is now 78% complete, our cost per home has continued
to decrease as homes requiring more extensive repairs were addressed first,
coupled with improvement in the internal processes and procedures gained in
addressing the issues.
As
Ian
mentioned, the results also include pretax charges to abandon land option
contracts and to recognize inventory and goodwill impairments of 44.8 million,
113.9 million, and 29.8 million respectively. I will comment on each of these
in
turn.
During
the quarter we decided to abandon 30 positions that we controlled under option.
In doing so, we forfeited option deposits and incurred other costs totaling
$44.8 million, nearly $20 million related to positions in Phoenix. As a result
of these abandonments, we reduced by approximately 5000 the number of lots
controlled under option. These positions were abandoned principally because
we
believe they would not contribute to profits in the current market environment
and because it eliminated significant dollars in future land and land
development spending.
Because
option contracts are one of the primary tactics we use to control land, we
expect to both add new option positions and potentially abandon others in future
quarters. Each quarter we review our inventory in accordance with FAS 144 to
determine whether the carrying value of that inventory needs to be adjusted.
As
many of you know, the basic test that determines whether an asset is impaired
is
a comparison of the undiscounted future cash flow of a project with its
inventory balance. When an asset is being carried for more than its future
cash
flows, we are required to reduce the asset based on a discounted cash flow
model.
This
quarter we incurred $113.9 million in impairment charges spread across 39
communities in 18 of our markets. A significant portion of the impairment was
recognized in Sacramento and Las Vegas, which represented approximately half
of
the total charge. The principal causes of inventory impairments are reduced
selling prices, including buyer concessions, and slower absorption rates. If
market conditions worsen from their present state, is it possible we will incur
further impairments in future periods.
Finally,
we also impaired goodwill this quarter by $29.8 million or 25% of total goodwill
recorded as of March 31st. The Company's goodwill is essentially all related
to
the Crossman Communities acquisition in 2002. The Company allocated the goodwill
created in that transaction to many of its then active markets, based on
anticipated benefits to be achieved across the Company. This method of
allocation included markets where Crossman did not build. Based on our analysis,
we determined that in Sacramento, Las Vegas and Tampa, the carrying values
were
in excess of the fair market value of the assets and, therefore, we reduced
goodwill accordingly.
We
test
goodwill annually as of April 30th, or more frequently if an event occurs or
circumstances indicate that the goodwill may be impaired. Our land position
as
of June 30th totaled 71,801 lots, 54% of which were owned and 46% of which
were
controlled under option. During the quarter, we reduced our lot count by over
31% compared to the prior year and by 10% from the March quarter, to
better align our land supply with our current expectations for home
closings.
We
continue to exercise caution and discipline with regard to land and land
development spending and have increased our internal return criteria as it
relates to any new land acquisition request. Year-to-date, land and land
development spending is down by $480 million compared to the same nine-month
period in the prior year.
At
June
30th, we had 443 unsold finished homes, down 38% from March of this year and
26%
from June a year ago. We have continued to significantly limit new home starts
as evidenced by the 32% decline year-over-year in unsold homes under
construction. When comparing the level of spec homes across builders, it is
important to recognize the definitions of specs vary widely. Our definition
includes a lot when it has been released for construction rather than waiting
until vertical construction has commenced.
As
for
our financial services segment, for the third quarter of fiscal 2007 our capture
rate defined as a percentage of mortgages we originate as a percentage of homes
closed with financing was 72%. This represented 67% of total homes closed.
For
those loans we originated, our average FICO score was 726 with almost 80% of
borrowers having a FICO score of 680 or better. Average combined loan to value
remained consistent with previous periods at 85%.
Fixed-rate
loans were 90% of the total, and the split between conventional and government
loans was approximately 90% and 10%, respectively. Only 1% of the loans were
subprime, defined as loans to a borrower with a FICO score below 620, down
from
3% last quarter, reflecting the tightening in mortgage lending requirements
for
credit challenged borrowers. At June 30th, net debt to total capitalization
stood at 52.6%, up slightly from the March level and just above our target
range
of 50% or lower, due to seasonal building and the impact on our balance sheet
of
the impairments.
We
had no
more borrowings outstanding under our revolving credit facility and
approximately $129 million of cash on hand. As we disclosed last quarter, due
to
the uncertainties in the market we are no longer providing earnings guidance.
But with our continuing focus on balance sheet strength and liquidity, I can
say
that we expect our cash balance at year and to exceed $300 million.
Given
both our expectations of this level of liquidity and our positive cash
generation strategy during the downturn, we announced today that we have entered
into a new $500 million revolving credit facility. This new four-year agreement
which matures in July 2011 replaces the existing revolving credit facility,
which was scheduled to mature in August of 2009.
The
new
facility increases our financial flexibility with regard to certain financial
covenants. In particular, the new agreement reduces the minimum level we must
maintain for interest coverage, defined as EBITDA divided by interest incurred
on a trailing four-quarter basis, from 2 times under the existing facility
to
1.1 times for nine quarters following the closing date.
This
steps up to 1.5 times for the 10th quarter and 1.75 times thereafter. The
covenants also reduced the minimum tangible net worth requirement by
approximately $200 million to $1 billion. At September 30th, the Company's
tangible net worth as defined in the agreement was $1.3 billion. The new credit
agreement contains an accordion feature which permits the aggregate commitment
to increase up to $1 million subject to the availability of additional
commitments if the Company determines additional capital is
warranted.
In
light
of the challenging market conditions for homebuilders, recent volatility in
the
credit markets and our ongoing investigations and litigation, we greatly
appreciate the support and confidence of our new bank syndicate led by Wachovia
and Citibank. The syndicate's commitment to Beazer Homes illustrates their
confidence in both the Company and the long-term fundamentals of the
industry.
I
will
now turn it back over to Ian for our concluding remarks.
Ian
McCarthy -
Beazer Homes - President & CEO
I
would
just like to clarify one point that Allan made when he talked about our tangible
net worth. The $1.3 billion was actually at June 30, 2007, not September 30.
Just wanted to clarify that point.
Let
me
then conclude these statements by saying that the current housing market
continues to be characterized by lower demand and higher inventories with heavy
discounting needed to drive meaningful sales volume. During this period, the
Company will focus on balance sheet strength, reducing costs and a disciplined
investment strategy to manage through these difficult market conditions and
be
positioned to take advantage of opportunities that will arise when conditions
stabilize.
To
refine
our investment strategy as an extension to our normal budgeting cycle, we are
currently undertaking a comprehensive review of every one our markets to
optimize the specific customer profile and related product range that we offer
in each market. The principal focus of this review is to identify those nodes
of
likely buyer demand within geographic submarkets that are best suited to our
capabilities.
We
will
use this analysis to allocate capital and resources in order to enhance
shareholder value. We will provide a further update at year-end regarding our
longer-term plans for investment and capitalization.
In
conclusion, we believe that we have our priorities in the right order, and
have
focused on those financial and operational initiatives that best position us
for
the challenges and opportunities that are likely to play out over the next
several quarters.
We
are
committed to maintaining a strong financial position, substantial liquidity,
and
a disciplined operating approach through the remainder of this year and in
preparation for fiscal 2008.
Allan
and
I would now be glad to answer your questions, and I would ask the operator
to
give the instructions for registering your questions.
QUESTION
AND ANSWER
Operator
(OPERATOR
INSTRUCTIONS) Larry Taylor, Credit Suisse.
Larry
Taylor -
Credit Suisse - Analyst
Good
morning and thanks. A couple of different questions. One, Allan, it is helpful
for you to give us some sense of your expected liquidity at year end. I may
have
missed it and I apologize if I did, any sense of the debt to cap which you're
--
are you going to get back to that 50% target do you think by
year-end?
Allan
Merrill -
Beazer Homes - EVP & CFO
I
think
ultimately, that will depend on what the actual cash balance is. We are
comfortable saying we will be above 300 million, so I think there is a good
chance of that.
Larry
Taylor -
Credit Suisse - Analyst
Okay.
In
the case of use of some of that cash over time, I wonder if you could comment
on
the possibility of bond buybacks?
Ian
McCarthy -
Beazer Homes - President & CEO
At
this
time we're not entering the capital markets while we go through the
investigation. We have been advised by counsel not to enter the market there
in
terms of buyback of stock or bonds. What I did say in the review that we are
undertaking of business in terms of how we are going to allocate capital going
forward, obviously the capitalization of the Company comes into that as
well.
So,
hopefully, we would give you an update at the end of the year in terms of
looking at the business and looking at the capitalization of the Company. I
hope
that answers the question.
Larry
Taylor -
Credit Suisse - Analyst
Yes,
thank you very much.
Operator
Robert
Manowitz, RBS.
Robert
Manowitz -
RBS - Analyst
Good
morning. Allen, I apologize, I think just before you gave your expectations
on
the cash balance at year-end, I think you may have highlighted the availability
under the revolver today, but I got distracted. Was that a number you gave
and,
if not, could you provide it?
Allan
Merrill -
Beazer Homes - EVP & CFO
It
is
not. We will have just under $300 million of availability under the new
revolver.
Robert
Manowitz -
RBS - Analyst
And
that
is as of --? As of June 30th. As of June? Correct?
Allan
Merrill -
Beazer Homes - EVP & CFO
Yes.
Robert
Manowitz -
RBS - Analyst
And
the
letters of credit that you had?
Allan
Merrill -
Beazer Homes - EVP & CFO
Are
factored into the availability under the line of credit.
Robert
Manowitz -
RBS - Analyst
So
it's
sort of around 40 or 50 million, and it hasn't changed
substantially.
Ian
McCarthy -
Beazer Homes - President & CEO
I
think
it is included in that number.
Robert
Manowitz -
RBS - Analyst
Okay.
The
final pricing on the revolver, what was that number?
Allan
Merrill -
Beazer Homes - EVP & CFO
The
pricing actually stayed consistent with the pricing that we had in the prior
revolver. The grid remained in place, and so the LIBOR spreads were
identical.
Robert
Manowitz -
RBS - Analyst
Refresh
my memory, something like 100,125 over LIBOR?
Allan
Merrill -
Beazer Homes - EVP & CFO
Yes,
I
think actually, the number might have been 112.5 in the current
ratings tier where we are.
Robert
Manowitz -
RBS - Analyst
Okay,
great. I am not sure what type of detail you might be able to provide on the
next question, but as I read through your press release, I was hoping you could
help me understand some of the disclosure on the investigation; and
specifically, the portion where you mention that various internal and external
investigations could adjust the "timing and content" of your existing and future
public disclosures? I was curious what you were trying to convey
there?
Ian
McCarthy -
Beazer Homes - President & CEO
Rob,
all
of those risk factors have been put in at the advice of counsel, and I think
it
stands for itself what it says there. I think that we don't want to elaborate
on
anything at this point related to the investigation or any other disclosure.
We
gave full disclosure there based on advice of counsel, and I really don't think
we can address it any further.
Robert
Manowitz -
RBS - Analyst
Okay,
that's a fair answer. One last question. Your 10-Q for the June quarter, should
we be expecting that shortly, or what would you convey there?
Allan
Merrill -
Beazer Homes - EVP & CFO
We
continue to work on its preparation, and its filing will ultimately be
determined in consultation with counsel.
Robert
Manowitz -
RBS - Analyst
Great.
Excellent. Good luck and thank you.
Ian
McCarthy -
Beazer Homes - President & CEO
Thanks,
Rob.
Operator
Andrew
Brausa, Bank of America Securities.
Andrew
Brausa -
Bank of America Securities - Analyst
I
wanted
to just ask you a question about -- the cash balance is down, call it around
$100 million in the quarter, and you reduced your inventory levels by about
$100
million and had some EBITDA. I was curious if you could go through some of
the
cash uses and how maybe that cash balance got burned down to where it
is?
Allan
Merrill -
Beazer Homes - EVP & CFO
Sure,
let
me just pull a few things out here. I think in general, the uses of cash related
to changes in homes under construction as we are in the seasonally higher
building period. And to the extent that you saw inventories reduced, that was
primarily affected by the impairments which are obviously non-cash.
Andrew
Brausa -
Bank of America Securities - Analyst
Okay.
I
was wondering if you could comment on the uptick in cancellation rates and
whether those would primarily be attributed to some of maybe promotional sales
from last quarter becoming cancellations this quarter, and whether you expect
more of those to happen as we go forward?
Ian
McCarthy -
Beazer Homes - President & CEO
So
let me
address that. The cancellation rate did tick up again. It was back to very,
very
normalized levels in the previous second fiscal quarter for us at 29%. They
have
ticked up again to 36%. The interesting point, though, is when we look at the
promotion that we held in the second quarter, in February of the second quarter,
the cancellation related to the backlog as we came into the third quarter was
actually down. So we actually feel good about that, that the sales that we
sold
through that promotional effort have stayed in place as we came into the third
quarter. So we feel very comfortable with that.
It
is
actually interesting now for us out to look at it both ways, both as a
percentage of gross new orders and as a percentage of the beginning backlog.
So
I think that says to us that those sales that came in through the promotion
actually stayed in place, and we feel very comfortable about that. So this
industry, as I said before, has become more promotional. We can't expect to
sell
the same number of homes every week. We have got to entice those customers
into
our communities and then sell them on the benefits of our community and the
home
that they are there for. The model is slightly different this time, and I think
you will see some fluctuations. You will see more fluctuations in the business;
we see it week by week, and I think that is just going to be a symptom going
forward.
Andrew
Brausa -
Bank of America Securities - Analyst
Okay,
thanks.
Operator
Michael
Rehaut, JPMorgan.
Jen
Consoli -
JPMorgan - Analyst
This
is
Jen Consoli on the line for Mike. Just a couple quick questions here. Regarding
the promotional activity in Q2, I thought that that was going to be continuing
perhaps into the third quarter. In looking at what your orders have done, the
decline seemed to accelerate pretty strongly. So just wanted to see if any
promotional activity did occur similar to 2Q, and if you were looking for that
going forward.
Then
as a
follow-up, just wanted to see how both orders and can rates turned throughout
the quarter, and if you saw any type of improvement in June.
Thanks.
Ian
McCarthy -
Beazer Homes - President & CEO
So
let me
address the first point. We have promotions all of the time now. There are
various promotions. What we are doing is we are coordinating them here through
our national marketing effort and through our Chief Marketing Officer. Sometimes
-- and obviously we're not going to talk about when we are doing this; it's
a
competitive business out there today -- we do have totally integrated national
campaigns. We had that in the second quarter; we had that in the third
quarter.
But
at
other times, we have campaigns and promotions driven through concepts and
promotional material driven from this office, but then undertaken locally in
markets as our local management deem fit. So I think the key point there is
there is still inconsistency in this market. Traditionally, the second quarter
is -- the April, the springtime -- is a stronger time for us than the summer,
although we are somewhat disappointed with the orders this quarter; I mean
down
about 30%.
Let
me
give you a couple of highlights, which is what you asked for. I am very pleased
to say that the strongest sales in the quarter across the Company, up almost
35%, were in Indianapolis. We are seeing some strength in that market. The
position of our business in that market is strong. We have always said that.
We
have had to address today the goodwill related to some of the Crossman
acquisition, but we are seeing some strength there. So I think Indianapolis
has
really shown some strength there, giving us the best orders for the
quarter.
There
aren't too many other highlights, but I would certainly say -- I would highlight
Northern California, which coming from a low base we have had a tough time
in
Northern California for a while, but we have had substantial gains there, in
the
markets there in both Sacramento and Fresno, so I am very pleased with
that.
There
are
other isolated markets that I think I will give you a list one month and it
will
different to the next month, and it will be different to the next quarter.
So I
would really just highlight those couple of markets. And across the board,
we
are seeing the market is still tough.
The
final
market I would say that I am pleased with the numbers would be in Phoenix,
Arizona, where we have a fairly substantial base of sales there and they have
held up pretty well year-over-year. So we have seen in the third quarter here
Phoenix hold up pretty well. That market has been through some tough times,
so I
would highlight those three markets that we're seeing some strength here. I
hope
that answers your question there, Jen.
Jen
Consoli -
JPMorgan - Analyst
Turning
throughout the quarter, did you see any type of pickup in June, either as far
as
can rates or orders, or is it kind of a straight downward trend
throughout?
Ian
McCarthy -
Beazer Homes - President & CEO
As
I said
earlier, we see changes every week. So I wouldn't try and draw anything into
June or any of the particular months. It is really just up and down
inconsistently as we go forward. But I just wanted to point out some of those
markets that we're seeing some strength in, we're seeing some return to, what
we
would hope will be stronger markets.
Jen
Consoli -
JPMorgan - Analyst
Great,
thank you.
Operator
Susan
Berliner, Bear Stearns.
Susan
Berliner -
Bear Stearns - Analyst
Allan,
I
just wanted to go back to the liquidity. If you take your $300 million available
on your bank line and then add in a cash portion, I assume it is roughly around
$400 million in total liquidity; is that correct?
Allan
Merrill -
Beazer Homes - EVP & CFO
It
is.
Susan
Berliner -
Bear Stearns - Analyst
And
then
I was wondering if you could just go through what the free cash flow was for
the
nine months for use?
Allan
Merrill -
Beazer Homes - EVP & CFO
There
are
a couple of things going on, and I am glad you've asked the question, because
it
allows me to dig into this in a bit more detail. What you will have seen in
the
third quarter is a reduction in inventory levels that otherwise should have
generated cash from operations. But that reduction was really driven by a couple
of things. One was the impairments, which I mentioned.
The other is we have a bunch of FIN 46 assets, which are assets and liabilities you will see on the balance sheet, and you'll see that both of those reduced by about $70 million, so that doesn't become a source of cash during the period. So what increased that was hidden inside of both of those things was the buildup of the backlog that we had sold in prior quarters for delivery prior to year-end.
So
that
is, I think, a little more elaboration on why you would have seen an increase
in
inventory essentially reflected through the cash-flow statement in the third
quarter. If you combine the first six months where we had cash from operations
of $180 million with the third quarter where we had $84 million as a use, we
generated $100 million through the nine months in cash from
operations.
And
I
think by the time we get to the end of the year, we will have more than reversed
in the fourth quarter the third quarter's use of cash from operations. We will
have very significant cash from operations in the fourth quarter. And that
is
necessary, ultimately, to get to the guidance that we gave this morning that
we
will have over $300 million on the balance sheet at the end of the
year.
Susan
Berliner -
Bear Stearns - Analyst
Great,
thank you very much.
Operator
[Joe
Locker], FTN Securities.
Ian
McCarthy -
Beazer Homes - President & CEO
Operator,
should we take the next question? We seem to have lost Joe.
Operator
Carl
Reichardt, Wachovia Securities.
Carl
Reichardt -
Wachovia Securities - Analyst
I
had a
question just, Ian, if you -- again, you talked about you segmenting your
business out as you have for a long time into your relative price categories.
I
am curious if you're seeing any differentiated performance ex geography in
entry-level versus the more move-up price points that you have noted from an
absorption standpoint this quarter?
Ian
McCarthy -
Beazer Homes - President & CEO
I
would
give you one example where the market has been reasonably strong for us in
Houston, in Texas in particular, where we provide a lot of real entry-level
housing there, partly to the immigrant market. We've seen some overflow from
Katrina there. The market has gone down there quite substantially in this last
quarter at the entry-level point, and I think that is something that has been
really due to credit tightening as we have really seen that happen there. So
I
would use that as an example where we have seen a big swing in our sales in
Houston.
I
think
the same is happening across the country where the first-time buyers, the
economy as we call them, have been impacted more by the credit tightening.
And I
think as you move up into our value and our style product, those buyers are
being impacted more by the ability to resell their existing home. I think that
is more of the issue there than the actual credit.
And
I
think that you can see with our FICO store going up to around 726 now, the
credit of our buyers is very strong. It is actually stronger than it has ever
been since we've been giving these numbers. So I think that you're seeing a
difference between those different types of buyers, but I think there are
different factors playing into it.
Carl
Reichardt -
Wachovia Securities - Analyst
Okay.
As
a follow-up, you mentioned you have raised your hurdle rates. Theoretically,
if
you're in a market where you have worked on your lot position, you're relatively
light but your hurdle rates are up for reinvestment and land prices haven't
fallen, in that kind of a situation theoretically, what do you do? Do you
swallow your pride and re-enter the market, buy lots to keep your business
there
in a market that you like long-term, or do you exit and come back when you
think
the market is better?
Ian
McCarthy -
Beazer Homes - President & CEO
On
a
short-term basis, obviously, we take those decisions on a daily basis. That
is
just running the business on a daily basis. If we believe we have got to buy
something that is not today meeting the hurdle rate but we think it is the
right
thing to do, certainly we can take that decision. This is not an absolute;
it is
a management tool to give guidance to our managers and give a like-by-like
comparison.
But
what
I would say on the longer-term view, which is the our total investment strategy
review that we're going through right now, certainly we are going to be looking
at that. The return that we can get from not only the markets that we are in
but
the price point, the product range that we are in, that is what we're really
doing right now; that over the last few years we have really, as you've said,
stratified our business. And so we know who our buyers are, what are product
range is, what our price point is. And what we're really trying to do now is
look at a demand-driven analysis to see where we want to be positioned in those
markets.
So
if we
think there is a different risk reward ratio in any of those submarkets or
in
the sub-target profiles there, we might change the hurdle rate if we think
that
long-term benefit is there. And conversely, the opposite is also true that
if we
just don't see that long-term demand, we might raise the hurdle rate there.
So I
think short-term, we take those decisions every day. Long-term, we're taking
a
really hard look at everything that we are doing.
This
is
an excellent time for us to do that and position ourselves going forward. And
as
I said in the review, that will also take into account the capitalization of
the
business as well.
Carl
Reichardt -
Wachovia Securities - Analyst
I
appreciate the color. Thanks, Ian.
Operator
Andrew
Ebersole, Sentinel Asset Management.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
Good
morning. I have a question regarding your future orders. Are they likely to
be
equally balanced between owned land and option land, or is there a difference
in
mix that is going to impact whether or not you guys will have to fulfill the
orders by using owned land versus pulling down options?
Ian
McCarthy -
Beazer Homes - President & CEO
Obviously,
by walking away from some of the options, which was always the strategy, that
the reason for holding them in the first place is if we don't want to take
them
up, we don't have to. By walking away from some of those, obviously, we will
have slightly more owned land to work through. So I would think your assumption
there is, yes, the land that we own we will be working through.
Now,
at
the same time we have made a few land sales, so that where we think we have
land
that we own today that we believe is not going to give us the return that we're
looking for and we don't want to invest the capital into it to develop it out,
we can also sell that, and we have done that this quarter. We had land sales
of
a little over $73 million there.
So
we're
not taking the options down that will affect certain markets. In others, we
will
work through the land that we have on the balance sheet, but then where we
see
the opportunity and where we see a buyer for that land, we may also consider
selling it. So I think we will keep that ratio which is 50-50 plus or minus
5%,
that is always our target for owned and option. We will kind of keep that there,
but there may be some variability as we go through the various walkaways or
the
sales or the buildout.
Leslie
Kratcoski -
Beazer Homes - VP IR
Andy,
just to clarify, the land sales for the quarter were $19 million. Ian cited
it
was a nine-month number.
Ian
McCarthy -
Beazer Homes - President & CEO
Okay,
sorry about that. Thanks, Leslie.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
I
guess
what I'm getting at, from a working capital standpoint it is more cost-effective
or a pull-down of an option is more expensive than just using land that you
already have purchased when you build out a home. So is there any mix
considerations in terms of where people are buying? Are future orders going
to
come from areas or regions where you guys are predominantly option land that
you
would have to pull down, or is there any differentiation?
Allan
Merrill -
Beazer Homes - EVP & CFO
It
is
Allan. I would say the fact, just one layer below where Ian was discussing
it,
in each of the markets we have balance between owned and optioned. There are
a
couple of markets that we weight pretty heavily toward owned land -- actually,
in Texas and in Indianapolis would be the case -- and those happen to be among
the strongest aggregate order levels that we have.
So,
in
the near-term I would suggest that the mix will richen, if you will, slightly
toward owned land which will have the effect of releasing cash, which is
factored into the estimates that we have for the cash balance at the end of
the
year.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
Okay.
Then finally, regarding the cash balance, it was helpful that you guys provided
that number. Can you talk at all about your confidence level of achieving that
number, and maybe comment on whether that estimate assumes that existing markets
stay where they are at and no further deterioration?
Allan
Merrill -
Beazer Homes - EVP & CFO
Well,
I
think the mere fact that we offered it as a number indicates a pretty good
degree of confidence, because there was nothing that compelled us to do that.
But the fact is we've looked at the backlog and the margins in the backlog
and
developed a sense that we can achieve that.
Now,
you're absolutely right to say that if the markets were to take a very
significant leg down, while that wouldn't appear to affect the backlog, of
course it does. Because if you can't get those buyers to the closing table,
you
have a harder time generating the cash. I will say that we have provided an
element of conservatism in our estimates to allow for that at a limited level,
but there is absolutely no exact science on doing that.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
Is
the
can rate assumption basically flat from the third quarter for your
fourth-quarter estimates?
Allan
Merrill -
Beazer Homes - EVP & CFO
Well,
what I would say is the can rate is ultimately an outcome that we see at the
end
of the quarter. It is hard to predict it because it is actually affected by
the
mix of units within communities and then communities within markets. So I'm
not
sure I would make that statement.
The
statement I would make is that we have made at every individual community level
assumptions about can rates that are consistent with the behaviors that we
are
getting in those markets. But because of mix changes, I wouldn't jump to the
conclusion that the can rate is the same quarter to quarter.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
Then
lastly, relating to the investigations, it seems like you guys are being a
little bit more cautious in your disclosures as you mentioned in your press
release. And I am just trying to get a better understanding as to whether
something has changed with respect to the investigations that's going to make
your disclosures more legally problematic, or whether you guys are just taking
a
more cautious approach?
Ian
McCarthy -
Beazer Homes - President & CEO
Andrew,
as I said before, we really can't comment any further on this. As you
understand, we have a lot of advice from counsel, both to the Company and to
the
audit committee, so we just have to follow that advice. And we really can't
say
any more than that at this time. As I said, management is completely independent
of this review that we're going through. So I can't add anything further because
we don't have any further information to give you.
So
I
think you just have to take it as it is. I think we are a company that gives
full disclosure wherever we possibly can. Where we can give any more
information, we certainly will give it.
Andrew
Ebersole -
Sentinel Asset Management - Analyst
Thanks
very much.
Operator
David
Knott, Knott Partners.
David
Knott -
Knott Partners - Analyst
Hi.
Your
option write-off was $44 million, and that leaves you with I think 400 and
some
million in options; is that right?
Allan
Merrill -
Beazer Homes - EVP & CFO
I
think
it is a number more like 250, 270. I'll pull that out here.
Leslie
Kratcoski -
Beazer Homes - VP IR
277
of
nonrefundable deposits.
David
Knott -
Knott Partners - Analyst
I
see.
There was a recent report from one of the houses that analyzed people's options,
and you seem to have written off prior to today only 10% of your options. The
average guy has written off 33%. And you seem to have paid as a premium to
the
purchase price a 14% premium, and the average guy has paid 9%. And a lot of
the
guys that are sort of at 4, 5, 6% premiums have actually written off about
half
of those options. So my question is, why haven't you been more aggressive on
that front?
Allan
Merrill -
Beazer Homes - EVP & CFO
I
would
say that the analysis from the outside (technical difficulty) individual builder
option positions is very, very difficult. Because the thing that can't easily
be
determined is what are the rest of the terms and conditions of the option. I'll
give you just a couple of examples to think about. The first is, what
development requirements exist for the holder of the option? Who is liable
for
busts in land development budgets, for example?
The
other
element is what are the takedown requirements, with what velocity do you have
to
take down lots in order to keep the option alive, and what are the price
escalators? And I think the fact is, as you look at that mix of issues, it
is
very hard to pick the perfect ratio of deposit to value of underlying land
because you don't know what all of the risk characteristics are.
So
I have
a hard time with the third-party analyses that I have seen, frankly, trying
to
make sense of them. Because I know as it relates to our own situations, every
option frankly is a little bit different, and those in many instances where
we
have had a relatively higher deposit are substantially more flexible for us
from
a cash perspective. Those that have been lower have tended to be ones where
we
have had greater longer-term exposure.
So
it
doesn't directly answer your question, but I think it is important to understand
that there is more to this than the percentage of the ultimate value that is
reflected in the option price.
David
Knott -
Knott Partners - Analyst
What
are
you assuming with respect to land prices as you look at these options, that
they
remain flat from here or they go up or down or what?
Allan
Merrill -
Beazer Homes - EVP & CFO
I
think
we would all like to believe that slower sales and absorption activities will
translate directly into lower land prices, and that may eventually occur. It
has
been fairly sticky so far as we and others have been very reluctant to sell
land
positions at big discounts. I do think that there is an overall downward trend
but, of course, the exception to that will be the most attractive positions
within particular markets may see very low velocity of sales for a period of
time and may not see significant price reduction. So we are not making
assumptions that relate to significant decreases in land prices, although we
would certainly like to see that.
David
Knott -
Knott Partners - Analyst
Okay,
great. Thanks very much.
Operator
Lee
Brading, Wachovia Securities.
Lee
Brading -
Wachovia Securities - Analyst
Did
you
say whether or not the revolver, new revolver, is secured?
Allan
Merrill -
Beazer Homes - EVP & CFO
It
is
not.
Lee
Brading -
Wachovia Securities - Analyst
Okay,
that is what I assumed. Then just on the selling of incentives and so forth,
in
this environment have you guys -- how aggressive have you commented regards
to
taking contingencies or moved away from that, I guess, rather?
Ian
McCarthy -
Beazer Homes - President & CEO
Well,
we
certainly will take contingencies because we have a broad product range these
days, and a lot of our buyers are moving up from an existing home. So we will
certainly look at contingencies. If the buyer can't sell their home and we
have
another buyer for that home, we can write over it. We have that option in the
contract.
So
we
have to try and take every buyer that is there today. It is a tough market
out
there, and we have to be willing to look at all the conditions of that customer,
that that customer has as we go forward. So, yes, we will take them, but if
we
can write over it at some point with another buyer, we will look at that, maybe
move that first buyer to another lot within the community.
Lee
Brading -
Wachovia Securities - Analyst
Have
you
reduced doing contingencies, in that I have heard others have done that, done
so, because especially in this environment others trying to -- the potential
buyer trying to sell their home in this environment and then they don't and
they
back away, and then you're stuck with more spec?
Ian
McCarthy -
Beazer Homes - President & CEO
Certainly,
that is a consideration. But as I say, there are fewer buyers today than we
would like. So we have to work with these buyers and try and have them work
with
us. We give them advice on how to sell their existing home, we put them in
touch
with realtors in the market that we think will help them; a lot of different
tools that we have today. We certainly don't want to turn buyers away at this
point.
Lee
Brading -
Wachovia Securities - Analyst
Okay.
I
know you can't give me any specifics on this, but it was very helpful in the
cash flow for this year for the $300 million. But looking forward next year,
I
guess your initial thoughts you would be focused on generating cash for next
year as well, I imagine?
Ian
McCarthy -
Beazer Homes - President & CEO
I
think
-- we don't have numbers out yet for next year, but the whole game plan of
the
Company at this time is driving cash; that we are going to raise cash. We've
done it consistently throughout this year. We would look to raise cash again
next year, assuming the market stays as it is.
A
high-class problem for us will be if the market picks up and we actually have
to
use cash to build out the backlog that we built. But on today's scenario, we
are
preparing for the scenario where we will actually be static over the next year.
We don't see an upturn until sometime next year, and so we're looking to
generate cash, certainly I would say in the first half of the year.
And
that
is why we negotiated a new revolver. That is the reason that we expect to have
cash on the balance sheet at the end of this year. We expect to generate cash
as
we go into next year. We didn't need a $1 billion revolver. We scaled it back
to
$500 million at this time with the option, though, to take it back up to $1
billion between when we need it and then, again, with the commitment from the
banks at that time. But I think that is the game plan we have today. As I say,
high-class problem is we need to start using cash to build our backlog, and
that
is all we are hoping for at some point next year.
Lee
Brading -
Wachovia Securities - Analyst
Thanks
very much.
Operator
Stephen
Kim, Citigroup.
Jahanara
Nissar -
Citigroup - Analyst
This
is
Jahanara for Stephen Kim. I was wondering if you could comment on where you
see
gross margins, excluding write-offs, ending up at the end of the year? It seemed
like your gross margin excluding write-offs increased sequentially this quarter.
And if you could comment on that, that would be great.
Ian
McCarthy -
Beazer Homes - President & CEO
I
would
say at this time, it is very hard to talk about margins. We are far more focused
today on cash certainly. Without taking the impairment into account, the gross
profit in this quarter was about 14.5%, pretty comparable to the last quarter.
Again, without impairments, it was about 15%. But those are not numbers that
we
are either proud of or taking long-term business decisions on, because they
are
lower than we expect to have in the future.
But
our
focus at this time is to make sure that we don't build up inventory, that we
move our inventory through. We make sure that we have real liquidity, and that
is the game plan right now. That's the real reason that we didn't give guidance
last quarter or this quarter, because even though we have reasonable visibility
to the number of closings, we don't have absolute visibility because
cancellations are obviously higher than we expect. But we don't have good
visibility on the margins.
It
is one
of those things that sometimes to keep that backlog in place, we have to
renegotiate with the buyer as we go through the build cycle to the point of
closing the home. So margin visibility at this time is very low, and so it
is
not something that I think you really should be focused on. We will get back
to
looking at -- the margins, obviously, going forward are very important, but
at
this time it is less important to us than having strong liquidity.
Jahanara
Nissar -
Citigroup - Analyst
Okay.
Can
you give me the breakout of cash flow from operations for the
quarter?
Allan
Merrill -
Beazer Homes - EVP & CFO
It
will
be in our subsequent 10-Q filing.
Jahanara
Nissar -
Citigroup - Analyst
Okay,
thank you.
Ian
McCarthy -
Beazer Homes - President & CEO
Thanks.
Operator,
any more questions?
Operator
No
further questions, and I would now like to turn the call back over to you,
Mr.
Ian McCarthy, for closing comments.
Ian
McCarthy -
Beazer Homes - President & CEO
Thanks,
operator. I'd just like to take this opportunity to thank all of you for joining
us today and remind you that a recording of this conference call with the slide
presentation will be available this afternoon in the Investor Relations section
of our website at Beazer.com. Thanks very much and good-bye.
Operator
Thank
you
for participating in today's conference. You may disconnect at this
time.